Does conventional wisdom make economic sense? In many cases, it doesn't. This blog will question the economic efficiency and market viability of popular "solutions" to today's problems. Copyright 2011.

Friday, June 27, 2008

Alternative energy is great, so long as it is cost effective. As reported in Green Car Journal, and written about by Bill Visnic at Edmunds Auto Observer, in one 3 bus test, hydrogen fuel cells are a bust, big time.

Here is the background:

"To fulfill a California Air Resources Board requirement that operators of large bus fleets participate in a Zero-Emission Bus demonstration program, in 2005 the Santa Clara Valley Transportation Authority purchased three buses powered by early versions of fuel cells developed by Ballard Power Systems Inc. of Vancouver, Canada."

OK, I am all for pilots, prototypes and testing. Sometimes it leads to very successful outcomes, and other times they just miss the mark. That is why Boeing and Airbus do destructive testing of airplanes. However, before these pilots take place, there is usually a fairly accurate prediction of the outcome. Additionally, good business practices provide that if the predictions and assumptions are wildly off, the pilot is canceled.

In the case of Santa Clara, these buses were a complete flop. The article states that the usual cost per mile to operate a diesel bus is $1.61, however, with the hydrogen fuel cell system, it is $51.66. Further, the hydrogen fuel cell buses broke down with greater frequency and the cost to repair were significantly higher. A diesel bus has a per mile part cost of $0.34, while the fuel cell bus per mile part cost was $34.40. Wow! As if those figures weren't enough, the fuel cell bus broke down six times more than the diesel bus. So, about every 1000 miles, the fuel cell bus broke down. Would you tolerate that in any of your personal or fleet vehicles???

Not that this test was all bad, the company who made the bus, Ballard, has decided to exit the vehicle fuel cell business and sell the assets to Ford and Daimler. That my friends, is economic efficiency.

Wednesday, June 25, 2008

Does the conventional wisdom about ethanol for fuel make economic sense? In general the answer is clearly "No!" If you are a corn or sugar cane producer, the answer is certainly "Yes!" With all economic analysis, measures of success vary among parties.

If one is just a consumer of gasoline in the US, which is mandated by law to have at least 10% ethanol, the answer is no. Ethanol, when blended with gasoline, is less fuel efficient and creates more emissions through incomplete combustion.

Although ethanol had been envisioned to reduce dependence on foreign oil, the opposite has occurred. It takes more fuel to plant, tend, and harvest corn and sugar cane, and then to process it, than the resulting ethanol saves. Additionally, ethanol blended gasoline is more expensive to purchase, and since it is less fuel efficient, it is less efficient to use.

Further, when existing crops such as corn and sugar cane are taken off of the food market to ethanol, the price of those crops goes up, as does the price of food. Higher food prices lead to both local and global insecurity. Is getting less mileage, creating more pollution, and spending more at the grocery store worth it?

From a farmer's point of view, using crops which are often subsidized, even sometimes subsidized to destroy, in a useful manner is good. Arguably, higher prices lead to higher output and that is better for the agriculture sector in general. A strong agricultural sector leads to greater food security.

So who is right? From an economic efficiency point of view, the consumer is right and the farmer wrong. The costs to the consumers far outweigh any potential and specific gains to farmers and the agricultural sector. Additionally, the detrimental impact of increased air pollution also tilts the scale in favor of the consumer.

Clearly, using corn or sugar cane to make ethanol for fuel doesn't make overall economic sense.

Tuesday, June 24, 2008

When initially deciding the four topics to start off my blog, I included solar because of its popularity. Solar energy is a very broad topic and this post is not intended to cover all possible aspects and applications of solar. Instead, I will focus on photovalic applications and not other more sophisticated uses, as many are still in the research phase.

In simple terms, photovalic modules are used to collect solar energy which is then transformed into electricity. This electricity can either be AC or DC. In some instances, such as calculators, garden lighting, and other applications with very low electrical requirements.

However, when compared with traditionally generated electric power, solar is not economically efficient. The US Department of Energy states:

"The cost of larger PV systems (greater than 1 kW) is measured in "levelized" costs per kWh—the costs are spread out over the system lifetime and divided by kWh output. The levelized cost is now around 30 cents/kWh." http://www1.eere.energy.gov/solar/pv_quick_facts.html

As of January, 2008 the US average cost per kWh was 10.2 cents, well below the solar cost of 30 cents/kWh. Again, this figure comes from the US Department of Energy, http://www.eia.doe.gov/cneaf/electricity/epm/table5_6_a.html

So, why is solar so popular? In many respects, it is the new, shiny toy. Also, there is the allure of "free" electricity. However, as the old adage states, "If its too good to be true, then it probably is." One has to recall that to convert one form of energy to another, there is loss. When one burns coal, heat is the main output, true also for any fuel that burns. What makes coal and fossil fuels in general, more efficient is that their combustion creates very high amounts of heat per unit. This heat is generally used to create steam, which then turns turbines (dynamos) to create electricity.

Solar has potential, but at today's cost points, it is only economically efficient in certain applications. Personally, I am renovating my home and looked into solar roofing shingles, as well as other PV collectors. In both cases, their cost well exceeded the benefits. However, a solar-powered attic fan may be just the thing.

Sunday, June 15, 2008

Gas is about $4.00 a gallon where I live, almost twice what it was a year ago. So what? If you are considering a hybrid, it is a pretty big so what. When I was considering the costs and benefits of hybrids a year ago, I came to the reasoned conclusion that there was little economic benefit to be had. The clear reason was that cost savings from using less fuel didn't cover the acquisition cost. Most hybrids tend to several thousand dollars more than their non-hybrid siblings.

The US government, as well as many state governments, decided they should lavish hybrid owners and manufacturers with tax payer money (a.k.a. subsidies), as well as certain privileges, such as driving in HOV lanes without other passengers. They did this to encourage the technology, ostensibly to reduce emissions as well as dependence on foreign oil. Arguably, those may be noble goals, but the number of potential vehicles wouldn't make a dent in either of the issues. ULEV (Ultra-low Emission Vehicles) are able to reduce vehicle emissions without having to worry about recycling or producing expensive battery packs needed for hybrids. Additionally, there are several models of inexpensive gasoline-powered cars that get similar mileage for less money, not to mention diesel-powered vehicles.

Back to the question at hand, will a hybrid save its owner enough money to justify the premium price? The answer is found by using a simple formula. Take the fuel economy of a non-hybrid and multiply by the average number of miles per tank to get price per mile. Do the same thing with the hybrid. Subtract the two results. Take the difference and multiply by tanks per year. So, if one saves $500 a year, and its a 5 year loan, the owner saves $2500 over the life of the car. Is that amount greater than or less than the premium to by the hybrid? That answer will determine generally whether owning a hybrid makes sense from an economic point of view. $4.00 gasoline has really changed the outcome of that equation, making them more attractive. I tell you what I am waiting for though, hydraulic diesel hybrids, as they don't require batteries to store power. UPS is running a pilot now. Details can be found here.

Thursday, June 12, 2008

Whether you believe in global or warming or not, money is being made selling what are known as carbon offsets. According to TerraPass, A carbon offset is a certificate representing the reduction of one metric ton (2,205 lbs) of carbon dioxide emissions, the principal cause of global warming. Although complex in practice, carbon offsets are fairly simple in theory. If you develop a project that reduces carbon dioxide emissions, every ton of emissions reduced results in the creation of one carbon offset. Project developers can then sell these offsets to finance their projects.

Of course, TerraPass doesn't do this out the kindness of its heart, one has to be a member, which is either pay as you go, or business programs.

What will not be discussed is whether carbon offsets is a moral good or not, rather this is a discussion of whether it is or isn't economically efficient.

In one respect, TerraPass follows the existing model of the market for pollution credits in the US. Power plants and major industrial entities receive pollution credits and are able to sell them to more polluting entities. The incentive to become a lesser polluter is there. However, the incentive must be greater than or equal what that capital could earn versus other projects. It has proven to be a successful program, to one degree or another.

While this program may work for businesses, as there may also be government subsidies, whether it makes economic sense for individuals is another matter entirely. Consumers must be willing to part with $9-$26 to "reduce their carbon footprint." Does that purchase make economic sense?

Arguably, the answer is "no." That money could be used to finance home conservation projects, like installing weather stripping or building a cistern. What TerraPass is making money on is a sense of moral guilt. Those who are most concerned with global warming are buying feel-good credits to tell their friends they live a "carbon neutral" lifestyle.

As stated above, if you are really concerned about reducing your carbon footprint, consider conservation and home energy efficiency projects. I maintain another blog that discusses green roofs, which I think is economically efficient at reducing air pollution and storm water runoff (http://www.cleanerairforcities.blogspot.com)